7. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?

Cash flows have a greater present value than accounting profits.

Cash flows improve the tax position of a firm more than accounting profits.

Cash flows are more stable than accounting profits.

Cash flows reflect the timing of benefits and costs more accurately than accounting profits.

8. Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta expects its working capital to increase $1,000 during the life of the project. Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero. The machine's purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machine's initial cash outflow is:

9. Which of the following is most likely to occur if a firm over-invests in net working capital?

The return on investment will be lower than it should be.

The times interest earned ratio will be lower than it should be.

The current ratio will be lower than it should be.

The quick ratio will be lower than it should be.

10. Metals Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common equity. Metals Corp.'s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Corp.'s weighted average cost of capital?

13. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?

$15,000

$35,000

$25,000

$45,000

14. Which of the following could offset the higher risk exposure a company would face if it’s current ratio and net working capital were relatively low?

Its accounts receivable collection policy could increase the average collection period.

It could offer no discounts for early payment by its customers.

It could buy back some of its shares in the open market in order to reduce its equity.

15. The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January. It will cost them $5,000 per night for theater rental, event insurance and professional musicians. The theater will also take 10% of gross ticket sales. How many tickets must they sell at $10.00 per ticket to raise $1,000 for their organization?

23. Project Sigma requires an investment of $1 million and has a NPV of $10. Project Delta requires an investment of $500,000 and has a NPV of $150,000. The projects involve unrelated new product lines. What is your evaluation of these two projects?

Only project Delta should be accepted. Alpha's NPV is too low for the investment.

Neither project should be accepted because they might compete with one another

The company should look at other investment criteria, not just NPV.

Both projects should be accepted because they have positive NPV's

24. Capital Structure Theory in general assumes that:

A firm's value is determined by discounting the firm's expected cash flows by the WACC.

A firm's cost of capital rises as a firm uses more financial leverage.

A firm's value is determined by capitalizing (discounting) the firm's expected net income by the firm's cost of equity.